ABA to IRS: Create Safe Harbor for Forked Cryptos

The Internal Revenue Service (IRS) needs to establish guidelines on how Americans can report gains from hard-forked cryptocurrencies, the American Bar Association Section of Taxation said Tuesday.

Section Chair Karen Hawkins wrote a letter noting that "several important developments in the cryptocurrency economy have taken place" since the IRS previously issued guidance on the federal income tax treatment of cryptocurrencies in 2014.

Specifically, Hawkins notes a lack of clarity as to how to address coins derived from hard forks, or instances where a blockchain software splits into competing versions. The letter advises the IRS to provide guidance "that offers a temporary rule, in the form a safe harbor" for affected taxpayers.

Hawkins wrote that such guidance would mean that taxpayers who owned coins created by hard forks in 2017 would be treated as having received the coin from a taxable event. However, the coin would have a value of $0 at the time of the fork.

Under these provisions, the holding period of the forked coin would start at the time of the hard fork. Such guidance would allow taxpayers opting to follow the safe-harbor guidance to be safe from understating their federal tax liability due to their forked coins.

The letter reads:

"This temporary rule has the benefit of encouraging consistency among taxpayers with respect to 2017 hard forks, avoiding difficult timing and valuation issues (including the ability of tax payers to benefit from hindsight depending on how the values fluctuated during 2017), and providing information to the service regarding holders of the original forked cryptocurrencies."

The letter also notes that adopting the recommended guidance may mean that capital gains taxes, rather than income taxes, would apply to the forked coin holdings, but "it preserves the full value of the forked coin for taxation when the taxpayer sells it."

The taxation of cryptocurrencies has been something of a point of contention since the IRS first announced that it would treat cryptocurrencies as property in 2014.

In January, major exchange and wallet provider Coinbase began reminding its customers to fulfill their crypto tax obligations and subsequently unveiled a tax calculator tool.

Tax forms image via Shutterstock